49 Savings
Stropoli
While many economists think more saving leads to productive investment, Sufi, Princeton’s Atif Mian, and Harvard’s Ludwig Straub make a different argument. They find that these savings are largely unproductive, being remade by the financial system into household and government debt. And their research outlines a cycle whereby the savings of the top 1 percent fuel the debt and dissavings of the lower 90 percent, which in turn leads to more savings at the top.
From the 1980s through 2007, the top 1 percent financed a large portion of the overall rise in household debt for the lower 90 percent, according to the researchers. And as the rich have accumulated capital, the less wealthy have accumulated fewer assets, which means they experience less financial stability overall. Thus, the work argues, the savings glut of the rich, and its role in financing unproductive debt and dissavings of the nonrich, leads to instability not only for the less economically privileged but also for the broad economy.
Mian and Sufi argue in 2018 research that a rapid flow of foreign funds into the US triggered a credit-supply expansion that boosted household debt, which they say was a major factor in igniting the financial crisis.
From 1982 to 2016, the glut of the US rich was, on average, 60–75 percent of the size of the global glut. And at times in the 1990s and 2010s, the amount rich Americans put away even exceeded the global glut.
Credit Suisse’s 2020 wealth report finds that the US has about 20 million millionaires, 40 percent of the global total. Meanwhile, the Billionaire Census 2020 from Wealth-X, which provides information and insight on the world’s wealthiest individuals, finds the US has about 28 percent of the world’s billionaires, who hold a 36 percent share of global billionaire wealth. The world now has a record 2,755 billionaires, according to Forbes.
The top 1 percent of households in the US have just as much influence as emerging-market economies in fueling the debt of the bottom 90 percent.
More savings, less investment
Ideally, all those savings would be channeled into productive investments such as research and development, or practical equipment, or new roads, or even new yachts—investments that would promote growth in the economy. However, from 2000 through 2016, the average annual savings of the top 1 percent exceeded average annual net domestic investment as a percentage of GDP. While the rich saved more, investment in productive assets declined.
Those savings were put to use financing both household and government debt. Between 2000 and 2016, they find that claims on household and government debt account for nearly two-thirds of the rise in asset accumulation of the top 1 percent in the US.
In the 25 years leading up to the 2008–09 financial crisis the top 1 percent financed almost a third of the rise in household debt owed by the bottom 90 percent. In the years since the crisis, and since the housing bubble burst, the savings of the rich have gone more toward government debt
Not all household and government debt is unproductive, of course. More than one entrepreneur has financed a startup on a credit card or with a personal loan. However, much household debt goes toward instruments such as mortgages and home equity loans, which can be used speculatively, in which case they are less productive than, say, investments in manufacturing plants or technology. Thus, the researchers argue that mortgages, while enabling homeownership, can also help perpetuate a cycle of wealth inequality.
The rich are seeking returns on their excess savings because, as Sufi says, many of them “just cannot spend all the money they make.”
The US government, by providing tax breaks on debt interest, and by encouraging banks to lend via debt financing, promotes less-productive investment
Nonfinancial corporations have increased their holdings of money market funds and time deposits by 10 percentage points of national income since 1995.
Since the early 2000s, the amount of corporate saving not invested in new capital has increasingly accumulated as cash.
Say a corporation issues equity to the wealthy, but instead of spending the proceeds on research or equipment, puts that money into a time deposit at a bank, which in turn uses it to fund a mortgage for a less-affluent household. This is how the rich become lenders.
Some politicians, economists, and pundits say that people are borrowing (and consuming) irresponsibly. But banks with all that cash on hand work to expand the credit market and realize returns on the savings glut of the rich. The bottom 90 percent are being convinced to borrow more and more, through lower interest rates, easier credit, and more advertising.
From the 1980s through 2007, the net amount of household debt that the top 1 percent held as a financial asset rose by 15 percentage points of national income, while at the same time the amount of household debt that the bottom 90 percent owed as a liability rose by 40 percentage points. The so-called accumulated dissavings of the bottom 90 percent from 1983 to 2015, relative to the average level from 1973 to 1982, was over twice the national income, the researchers say.
The debt trap
As the savings of the rich go toward the borrowing of the nonrich, there may be a GDP boost in the short run, as it does encourage consumption. But the debt becomes a drag on future demand. The cycle of unproductive debt makes it hard for consumer demand to support full employment in the economy, and it ultimately forces central banks to lower interest rates. While lower rates may strengthen demand for a time, consistently low rates may be problematic. Persistent low demand can foster a high-debt liquidity trap—or debt trap—in which economies are stuck in long periods of sluggish growth.
Stropoli (2021) How the 1 percent’s savings buried the middle class in debt
Inequality
Wealth among the superrich has been fueled by a marriage of in-demand skills, globalization, and technology—the combination of which are allowing businesses to scale up as never before.
Skills, say many economists, are critical to the modern economy. As the US economy grows, jobs are going unfilled as companies scramble to find skilled people to hire. There’s a flip side to this: as certain skills have become scarce, this has raised the amount companies are willing to pay people who have them. The situation has similarly raised the amount of profits skilled company owners can make, and technology and globalization are further magnifying the value of in-demand skills. If this is true, the 0.01 percent are most likely benefiting from what economists call “skill-biased technological change”—the increasing return on certain skills in an economy driven by technology and globalization Under this well-established theory, a shortage of in-demand skills raises the value of those skills in rapidly expanding markets, and new technology helps some workers’ productivity grow much more than others’, exacerbating inequality.
In the Information Age, the change has been particularly pronounced. “In business, you can use technology to do things you couldn’t do 30 years ago,” says Steve Kaplan. “You can scale your business using technology, and you can use people in India and China and all over the world—you couldn’t do that as effectively 30 years ago.” This, he argues, has been spectacularly positive for poorer people in developing countries. In 1990, the World Bank estimated that roughly 35 percent of the world lived in extreme poverty. Today, less than 11 percent of the world’s population is so impoverished.
And it has been good for wealthy residents of developed countries. For them, the result has taken the form of the “superstar” or “winner-take-all” phenomenon, first identified in a landmark 1981 paper by the late Sherwin Rosen, who taught at the University of Chicago. “In certain kinds of economic activity there is concentration of output among a few individuals,” wrote Rosen. “Relatively small numbers of people earn enormous amounts of money and dominate the activities in which they engage.”
Technology allows a hedge fund to be able to manage $20 billion and invest it,” says Steve Kaplan. “I don’t think people had the systems and information to do that 20 to 30 years ago. Now they have the systems and the information to do that. That technological change is here and is not going away. If anything, it’s getting stronger.”